May 2012 ISM Manufacturing Declines, Important Component Strengthens

Written by Steven Hansen

The ISM Manufacturing survey for May 2012 (released today) points to an improving economy, even though the main index declined.

The ISM Manufacturing survey index (PMI) declined from 54.8 to 53.5 (50 separates manufacturing contraction and expansion). This was on the low end of expectations which were between 53.0 and 55.0.

Econintersect sees the new orders sub-index as having a higher and more precise correlation to recessions and the economy then the PMI overall. This subindex has expanded breaking the old declining trend channel, and remains solidly in expansion territory.

The noisy Backlog of Orders again declined to 47.0 from 49.5 last month. Backlog growth is an indicator of improving conditions; a number below 50 indicates contraction.  Backlog accuracy does not have a high correlation against actual data (although last month’s decline did prove accurate).

“The PMI registered 53.5 percent, a modest decrease of 1.3 percentage points from April’s reading of 54.8 percent, indicating expansion in the manufacturing sector for the 34th consecutive month. The New Orders Index continued its growth trend for the 37th consecutive month, registering 60.1 percent in May. This represents an increase of 1.9 percentage points from April and also the highest level recorded by the index since April 2011. The Prices Index for raw materials fell to 47.5 percent in May, dropping 13.5 percentage points from April, indicating lower prices for the first time since December 2011. Comments from the panel generally reflect stable-to-strong orders, with sales showing steady improvement over the first five months of 2012.”

PERFORMANCE BY INDUSTRY – Of the 18 manufacturing industries, 13 are reporting growth in May, in the following order: Nonmetallic Mineral Products; Furniture & Related Products; Apparel, Leather & Allied Products; Miscellaneous Manufacturing; Primary Metals; Electrical Equipment, Appliances & Components; Fabricated Metal Products; Machinery; Textile Mills; Paper Products; Computer & Electronic Products; Printing & Related Support Activities; and Chemical Products. The four industries reporting contraction in May are: Plastics & Rubber Products; Petroleum & Coal Products; Food, Beverage & Tobacco Products; and Transportation Equipment.

It is interesting to note that ISM Manufacturing represents less than 10% of USA employment, and approximately 20% of the business economy. Historically, there is little linkage between real employment and the ISM employment index.

New orders have direct economic consequences. Expanding new orders is a relatively reliable sign a recession is NOT imminent. However, New Orders contraction have given false recession warnings twice since 2000.


Caveats on the use of ISM Manufacturing Index:

This is a survey, a quantification of opinion – not facts and data. However, as pointed out above, certain elements of this survey have good to excellent correlation to the economy. Surveys lead hard data by weeks to months, and can provide early insight into changing conditions.

Many use ISM manufacturing for guidance in estimating manufacturing employment growth. Econintersect has run correlation coefficients for the ISM manufacturing employment and the BLS manufacturing employment data series above going back to 1988, using quarterly data. The coincident correlations are actually negative, but poor (r = -0.2 to -0.4 for various time periods examined). See here for definitions.

Before 2000 the ISM employment data had a weak positive correlation to the BLS data 4 to 7 quarters later (r values above 0.6). Since 2000 the correlations for ISM manufacturing employment as a leading indicator for the BLS manufacturing employment have been between 0 and 0.3 for r (correlation coefficient). These values define correlations as none to poor.

In other words, ISM employment index is not useful in understanding manufacturing jobs growth. The graph below shows BLS manufacturing employment month-over-month gains against the ISM Manufacturing employment index.

The ISM employment index was right in predicting the direction of monthly manufacturing employment growth in 2011 about half the time.

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2 replies on “May 2012 ISM Manufacturing Declines, Important Component Strengthens”

  1. Steve,
    Most of your articles I have read this past month all seem to have a bullish bias. First, is my observation reasonable, and, if so, why are you so bullish?

  2. Jim,

    funny. half of my mail is saying i am too negative.

    i do not look around for data that supports any bias. quite honestly, i do not care except i hope for the best. i am not touting stocks. i have favorite portions of every release which are known to have a high correlation economically TO THE FUTURE. i do not jump around on my analysis cherry picking. i use the same data points month in, month out.

    my personal belief is that the economy is crappy, but not degenerating at this point. the bls jobs report is no better than dog poop (as it is terribly inaccurate in real time) – and you will find this hatred in all of work since i have been writing. IN ALL EVENTS, jobs is a lagging indicator – and according to my analysis, tells you about the economy’s average over the last six months. i believe only transport jobs have any real forward look and that was in good shape in the last report.

    the ism manufacturing report has little correlation to the economy – except the portion (new orders) that i have highlighted in this analysis (and in every analysis i have done).

    there in no specific correlation of pce or income to the economy. this too is very inaccurate in real time.

    bottom line, i was pretty negative about the future economy (while others were positive) six months ago. i consider it my role to forward look, not to jump up and down and tell you what you already know from the headlines of others – that the headlines of a particular report is good or bad.

    more importantly, i want to feed you information so you can make your own interpretation. feel free (seriously) to pick me apart – challenge my analysis with an alternate. i have no desire to sell you a bridge, only to do my best to describe the bridge.


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